China's inflation problem

Producer and consumer prices are diverging - which could spark trouble in the future.

China’s economic data have long been looked upon with a hint of suspicion. Inflation data is considered to be one of the better economic indicators produced by the China’s National Bureau of Statistics, however, recent outcomes have raised some questions. The producer price index (PPI) is considered to be a relatively reliable leading indicator of the consumer price index (CPI), as upstream price pressures, including the effect of higher commodity prices and raw materials, eventually trickle down and feed through to consumer prices. History has shown that it is broadly the case for China, with the CPI and PPI moving roughly in line with each other.

However, comparing the recent inflation outcomes at the consumer and producer level suggest a wide divergence in price pressures: rising consumer prices and falling producer prices in annual terms. The PPI has trended sharply downwards over the past year, down in deflationary territory for two consecutive months in April, while consumer prices have moderated more slowly. Growth in the CPI was 3.4 per cent in April 2012, moderating from a high of 6.5 per cent in July 2011, while the PPI which measures the selling price of goods and services sold at the wholesale level fell by 0.3 per cent in annual terms down from 7.5 per cent annual growth.

To some extent, the large recent falls in the PPI relates to a base effect; previously strong monthly increases in the index in late 2010 to early 2011 would reduce the magnitude of change in the index this year. But looking at the index rather than the growth, producer prices have also been subject to deflationary pressure in monthly terms – causing the index to fall slightly in late 2011, before more recently picking up.

The moderation in the PPI also reflects slackness in the manufacturing industry, where prices in the sector have fallen in annual terms for four consecutive months to be lower by 2.2 per cent in April 2012 compared to a year ago. This is in line with the continued moderating trend in industrial production, down to below 10 per cent annual growth in April – representing the weakest growth since the 2008-09 slowdown. Meanwhile, consumer prices have been driven largely by high food prices, which accounts for around one-third of the consumer basket.

The divergence between consumer and producer prices also highlights different operating conditions for upstream and downstream manufactures. Input prices have risen significantly, suggesting that profit margins for upstream manufacturers are taking a hit. Commodity prices have remained elevated; wage pressures have intensified with minimum wages rising by around 20 per cent annually in many provinces, while exchange rate appreciation has also cut into manufacturer’s profit. Anecdotes suggest that many exporters are declining large overseas orders, given the lack of skilled workers, tight credit conditions stemming from the government’s ‘prudent monetary policy’ and uncertainty over the pace of renminbi appreciation.

On the other hand, however, downstream manufacturers, which are less vulnerable to higher input prices, appear to be experiencing an improvement in their profit margins due to the positive gap between consumer and producer price inflation. Looking at reported profits across industries, consumer-related sectors appear to be best performers. In the three months to March, profits of automobile manufacturers increased by 6.3 per cent annually, while profits in the sectors of raw chemical and chemical products fell by 23.1 per cent and even further for ferrous metal mining and processing (down 83.5 per cent).

Looking ahead, it is expected that the gap between producer and consumer prices will eventually close in the coming months on the back of an improvement in manufacturing demand and possible relaxation of government credit restrictions. As per the government’s inflation target, consumer price inflation is set to average 4 per cent in 2012, which would mean relatively strong monthly growth of around 0.4 per cent over the remainder of this year. Should this be achieved, producer prices will need to rise at a much faster pace in accordance with the consumer and producer price relationship.

Until the figures get back on track, it is not unreasonable to expect the concerns felt in many countries about the accuracy of inflation numbers might well spread to China. Trying to get representative prices for a basket of goods that reflects the experiences of the majority is increasingly hard in complex economies prompting many to question the accuracy of one of the most important economic variables.

Chinese workers assemble electronics. Photograph: Getty Images

Niloofar Rafiei is China economist at Timetric, provider of economic data visualisation and analysis.

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Can Trident be hacked?

A former defence secretary has warned that Trident is vulnerable to cyber attacks. Is it?

What if, in the event of a destructive nuclear war, the prime minister goes to press the red button and it just doesn't work? 

This was the question raised by Des Browne, a former defence secretary, in an interview witht the Guardian this week. His argument, based on a report from the defence science board of the US Department of Defense, is that the UK's Trident nuclear weapons could be vulnerable to cyberattacks, and therefore rendered useless if hacked. 

Browne called for an "end-to-end" assessment of the system's cybersecurity: 

 The government ... have an obligation to assure parliament that all of the systems of the nuclear deterrent have been assessed end-to-end against cyber attacks to understand possible weak spots and that those weak spots are protected against a high-tier cyber threat. If they are unable to do that then there is no guarantee that we will have a reliable deterrent or the prime minister will be able to use this system when he needs to reach for it.

Is he right? Should we really be worried about Trident's potential cyber weaknesses?

Tangled webs 

The first, crucial thing to note is that Trident is not connected to the "internet" we use every day. Sure, it's connected to the main Ministry of Defence network, but this operates totally independently of the network that you visit Facebook through. In cyber-security terms, this means the network is "air-gapped" - it's isolated from other systems that could be less secure. 

In our minds, Trident is old and needs replacing (the submarines began patrolling in the 1990s), but any strike would be ordered and co-ordinated from Northwood, a military bunker 100m underground which would use the same modern networks as the rest of the MoD. Trident is basically as secure as the rest of the MoD. 

What the MoD said

I asked the Ministry of Defence for a statement on Trident's security, and while it obviously can't offer much information about how it all actually works, a spokesperson confirmed that the system is air-gapped and added: 

We wouldn't comment on the detail of our security arrangements for the nuclear deterrent but we can and do safeguard it from all threats including cyber.

What security experts said

Security experts agree that an air-gapped system tends to be more secure than one connected to the internet. Sean Sullivan, a security adviser at F-secure, told Infosecurity magazine that while some hackers have been able to "jump" air-gaps using code, this would cause "interference" at most and a major attack of this kind is still "a long way off". 

Franklin Miller, a former White House defence policy offer, told the Guardian that the original report cited by Browne was actually formulated in response to suggestions that some US defence networks should be connected to the internet. In that case, it actually represents an argument in favour of the type of air-gapped system used by the MoD. 

So... can it be hacked?

The answer is really that any system could be hacked, but a specialised, independent defence network is very, very unlikely to be. If a successful hack did happen, it would likely affect all aspects of defence, not just Trident. That doesn't mean that every effort shouldn't be made to make sure the MoD is using the most secure system possible, but it also means that scaremongering in the context of other, unrelated cybersecurity scares is a little unjustified. 

Barbara Speed is a technology and digital culture writer at the New Statesman and a staff writer at CityMetric.